Smith v. Loughman (245 N.Y. 486, 1927)

Cabdozo, Ch. J.

Mary J. Smith,' a resident of the State of Connecticut, died in November, 1925, leaving real and personal property which she devised and bequeathed to her four children. Included in her property was a parcel of real estate in the city of New York of the value, above the incumbrances, of $29,490.87, the value of the share of each child being thus $7,372.72. If the testatrix had been a resident of New York, the transfer of these shares by will would have been subject to a tax of $23.72 for each, or $94.90 for all. The tax as to each would have been computed at the rate of one per cent after allowance of $5,000, the statutory exemption. Because the testatrix was a non-resident, the four shares must bear a tax of $589.98. The question is whether such discrimination can be reconciled with that provision of the Constitution of the United States whereby “ the Citizens of each State ” are declared to be “ entitled to the Privileges and Immunities of Citizens in the several States ” (U. S. Constitution, art. IV, § 2).

Until the adoption of article 10-A of the "Tax Law in 1925 (L. 1925, ch. 143, § 9; Cons. Laws, ch. 60), the transfer tax in this State was imposed at the same rate and was subject to like exemptions and deductions whether the transfer was by resident or non-resident. The rate varied with the relationship between the testator and the devisees or legatees. A gift to a child, for illustration, was subject to an exemption of $5,000, and was taxed at one per cent upon the first $25,000 of the excess, and at higher rates upon successive increments. A gift to a friend, if for not more than $500, was free from any burden, and was taxed, if for a larger sum, at rates varying with the value from five per cent to eight. In the computation of the value, deductions were allowed for the debts and expenses of the estate, or the part thereof borne by the interest subject to the tax, the burden being proportioned to the clear market value of the property transferred. For the ascertainment of these facts there was need of an elaborate procedure which was laborious and at times vexatious even when followed in the jurisdiction of the domicile. Complaints .were heard at times that the vexations were excessive when the procedure had to be followed, not in one State, but in several. The ascertainment of the tax in a subsidiary jurisdiction had to wait upon the ascertainment of the debts and the winding up of the estate in the place of primary administration. This made the process of assessment dilatory and expensive, to the prejudice at times of the State and at times also of the taxpayer, whose property might be tied up until the assessment was completed. Evils such as these were from time to time recounted and deplored in the official reports of the State Tax Commission. They are not peculiar by any means to the assessment of taxes upon the estates of nonresidents. Many of the same hardships or inconveniences are incidental to the administration of the estates of residents. The difference is chiefly this, that the nonresident has an added grievance in going through the process more than once, at home and then abroad.

The Legislature of 1925, acting no doubt upon the recommendation of the Tax Commission of the State, split the system of transfer taxes into two parts. Under the Tax Law as thus amended, there is one scheme of taxation for transfers by residents, and another for transfers by non-residents. The tax upon transfers by will or intestate succession where the owner of the property was at death a resident of the State, is governed by article 10. It is substantially what it was before. The tax upon transfers by non-residents is governed by a new article of the statute, known as 10-A. Under this article a tax is imposed whenever the subject of the transfer is “ real or tangible personal property within this State,” shares of stock in domestic corporations or in national banking associations located in this State, interests in partnerships doing business in this State, or capital invested in business in the State (§ 248). The tax is to be three per cent of the clear market value, i. e.¡ the value after deducting a proportionate share of the debts and expenses of administration (§§ 248-a, 248-b). If, however, the executor or administrator prefers, he may waive the right to such deductions, and pay a flat rate of two per cent (§ 248-b). Such a choice will be profitable whenever the debts and expenses are less than a third of the gross estate subject to taxation. So, in the case at hand, the executrix elected to pay the flat rate of two per cent if the estate was to be taxed at all. A flat rate of two per cent upon the value of the gross estate is, however, a much heavier burden, as already pointed out, than the devisees would have had t